Errol Rudman isn't like most money managers. He doesn't work for a mutual fund or a pension fund or a bank. He doesn't work for anybody, actually. His firm, Rudman Partners, takes an incentive fee for managing private portfolios. And Rudman's personal fortunes rise or sink markedly with his performance. He has a sizable portion of his own wealth invested in the same stocks he buys for others.
So far this arrangement is working out nicely for all concerned. Rudman made 26 percent annually on his money during the 10-year period ending in 1986. After running a brief post-crash deficit of 7 percent for 1987, Rudman got back in stride last year with a 35 percent gain. So far this year he's up another 47 percent.Rudman prides himself on his eclectic stock-picking approach, adjusting his goals periodically to the evolving market environment. But there are some characteristics he's always looking for in a potential buy. As he recently told Barron's:
"I try to concentrate on companies with cash flow generation capabilities, strong or improving balance sheets, dominant market positions, managements that are highly motivated to enhance shareholder value, or companies that have fallen from favor on Wall Street for reasons that I sense are either short-term or shortsighted. If I can buy such a stock at a large discount to what I think it's worth, or at a low multiple of earnings-to-cash flow, I have the potential for a rewarding investment."
Rudman feels there are now many such potentially rewarding situations around. "The current P.E.s of stocks don't reflect the prospect for further declines in long-term rates and longer-lived economic expansion or lower inflation rates. The market can go materially higher and rates can go significantly lower."
Among his recent favorite stocks:
CASTLE & COOKE, an entrepreneurial conglomerate that recently issued "one of the most downplayed annual reports I've seen in a long time." Rudman estimates it's worth $50-$60 per share vs. its mid-$30s stock price.
CROWN CORK, the can and closures company, has no debt, accelerating earnings, a low price-earnings ratio and aging management, and operates in a takeover-prone industry.
MC CAW CELLULAR, even with its steep stock price, is a bargain, says Rudman, because cellular's penetration of the U.S. market will eventually be triple the current 5 percent to 8 percent estimates.
NEWS CORP., Rupert Murdoch's vast empire, is worth at least $60 in the private market, Rudman calculates, vs. its stock price in the mid-$20s.
PACIFIC TELESIS and SOUTHWESTERN BELL are Rudman's favorite Baby Bells because "they are accelerating their growth in non-regulated areas."
SHAW INDUSTRIES, the country's largest carpet manufacturer, is a cheap stock that can benefit substantially if lower interest rates boost house sales.
SOTHEBY's, the auction house, generates tons of pre-tax cash, and stands to benefit from increasing auction activity worldwide.
And finally, U.S. SHOE is beginning to profit from its restructuring. Rudman believes a positive earnings surprise could send this heavily leveraged concern sharply higher.
Investor's Notebook reflects the opinions of professionals. It does not endorse specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.